Bill of lading

What it means

A bill of lading is the sea transport document that a carrier or its agent issues when goods are loaded onto a vessel. It serves three functions at once: it is a receipt for the goods, evidence of the terms of the contract of carriage and a document of title representing ownership of the goods.

The third function is what sets it apart from other transport documents. Whoever holds an original bill of lading can collect the goods at the port of destination. By transferring the bill, the goods can be sold or pledged during the voyage without being physically moved.

A bill of lading may be straight (to a named consignee), to order or to bearer. This distinguishes it from an air waybill or a CMR note, which accompany the goods but are not documents of title, so the carrier releases the goods to the named consignee without an original being presented.

How it works in practice

The bill of lading is the key document in a letter of credit and a documentary collection. The seller hands the originals to the bank, which releases them to the buyer only against payment or a commitment to pay. Without the bill the buyer cannot collect the goods, so the seller is assured of payment.

Under a letter of credit, banks check the bill of lading very strictly: it must be clean, without remarks about damaged packaging, show shipment on board and match the credit's terms. Even a small discrepancy in the description of the goods or the date can lead to the documents being rejected.

The Incoterms rule determines who arranges carriage and obtains the bill. Under CIF or CFR the seller obtains it and passes it to the buyer. In container and intermodal transport a multimodal bill of lading covering the whole route is often used.

What to watch out for

A bill of lading is usually issued in three originals, and the goods are released against presentation of one of them. Losing an original is therefore a serious problem: the carrier will release the goods only against a bank guarantee, which is costly and sometimes runs for a long time.

On short voyages the ship may arrive before the documents. Goods are then sometimes released against a letter of indemnity, which increases risk for both carrier and seller. If there is no need to trade the goods in transit, an electronic document or a sea waybill without title function may be more practical.